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If you think federal budget is out of woods, think again

By Alison Acosta

The Heritage Foundation

Published: Tuesday, July 2 2013 12:00 a.m. MDT

To read the news, you'd think America's fiscal problems are under control. After all, following four years of $1 trillion-plus deficits, this year's will be "only" $642 billion. And Congress actually cut spending this year by letting the sequester happen.

So rather than worry about the debt, some are using this "progress" as a reason to focus on jobs and the economy. But this would be wrong.

Here are the facts: The sequester cuts affected only a part of the budget and shaved just 2.4 percent of all spending over the next decade. It left entitlements, the largest and fastest growing part of the budget, essentially untouched. So even though some programs really were cut, total spending barely budged this year. Next year it will take off again.

While deficits are smaller now, by the end of a decade they'll be back up around the $1 trillion mark. And they will soar as Social Security, Medicare and Medicaid and Obamacare costs skyrocket. All this mounting spending will only add to the already huge levels of federal debt.

Debt held by the public will jump from $11 trillion in 2012 to $19 trillion by 2023, a 73 percent increase. We will reach the debt limit again shortly. The debt limit includes both publicly held debt and debt owed to federal trust funds such as Social Security's. Today it is more than 100 percent of GDP - at $16.7 trillion and climbing. But it will swell to $25 trillion after a decade.

So for those who think our federal finances are improving and the job is done ... think again. Debt does matter.

First, high levels of debt mean that too many of our taxpayer dollars are wasted on paying interest. This is money that could have been better spent elsewhere, by letting us all keep more of our hard-earned money or by better funding national priorities such as defense.

Second, when debt gets high enough or rises fast enough, capital markets will notice and interest rates will rise. Worse, this can happen quickly and dramatically. Interest rates on mortgages, car loans and credit cards would go through the roof. Capital would immediately become more expensive, putting the dream of owning or expanding a business - and the jobs that go with that - out of reach for many. That interest rates haven't risen yet is merely the result of the Federal Reserve's quantitative easing policies and foreign investors seeing the U.S. as the best bet in a risky world. Both are a temporary anesthesia that will soon wear off.

Third, inflation could become a problem. As debt rises, the Federal Reserve could turn to an age-old, but dangerous tactic: printing money. This would reduce the value of the debt, but it would also usher in a new age of inflation. For younger Americans, inflation is almost an abstract concept since it has been so tame in recent years. But for many, the memories of everything we buy costing dramatically and persistently more is too real. Inflation is most insidious for the elderly, living on fixed incomes and watching the costs of everything from food to medicine soar with no way out.

Fourth, high levels of debt usually translate to much lower levels of economic growth. There is a growing body of evidence and rich economic studies that bear this out. For countries with debt at 90 percent of GDP, that growth can be nearly 25 percent slower, higher levels of debt mean even slower growth. So what does this mean for you and me? Fewer jobs and lower wages. And fewer opportunities, particularly for younger generations. This is bad enough, but U.S. debt is on track to reach 200 percent of GDP within a generation of so.

Fifth, this is not just an economic issue, this is also a moral issue. Put simply, running up massive debts and passing them on to younger generations is wrong, whether for a family or a government.

Washington's progress on spending and debt is woefully inadequate. Rather than high-fiving over the deficit, lawmakers should promise us this year's progress will be a first step toward more substantive and lasting steps to rein in spending and reform entitlements.

Alison Acosta Fraser is director of the Roe Institute of Economic Policy Studies at The Heritage Foundation (heritage.org).

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